'Strange and worrying' that Hong Kong government doesn't get it

For any confused officials, here's a quick rundown on the critical factors propelling the city's residential property prices up into the stratosphere

PUBLISHED : Tuesday, 16 October, 2012, 12:00am
UPDATED : Tuesday, 16 October, 2012, 5:29am

The weekend's Sunday Morning Post carried a strange and worrying news article.

It described Anthony Cheung Bing-leung's struggle to understand Hong Kong's property prices.

The market, he said, was in a "strange and worrying" state.

"Property prices are rising consistently, while our economic performance remains fragile," he lamented, evidently confused by what he clearly thinks is a wholly unreasonable divergence between market dynamics and underlying economics.

Considering that Cheung is the government's secretary for transport and housing, this is troubling indeed.

Surely it's not too much to expect that the housing secretary should have a solid grasp on what's driving the city's residential property market?

Evidently it is.

So, for all those government officials confounded by the market's buoyancy, here's a brief primer on why Hong Kong home prices continue to hit new records (see the first chart).

Firstly, we have interest rates. I promise not to bang on about rates too much, because both this column and Jake van der Kamp have covered the subject ad nauseam.

But it's worth saying again that with interbank rates at 0.4 per cent, homebuyers can get a mortgage at an interest rate of just 3 per cent.

And with the Federal Reserve promising to keep interest rates effectively at zero for another three years, buyers can feel confident their payments aren't going to rise much over the medium term.

As a result, although Hong Kong's median home price is now almost 13 times the city's median household income, provided you've got enough cash for the deposit buying an apartment is actually quite cheap.

According to property agency Centaline, the cost of servicing a mortgage on a typical Hong Kong flat currently amounts to 45 per cent of median household income.

That might sound steep to you or me, but it's actually below the long-term average cost, which stands at 48 per cent.

This brings us on to the second reason property prices are so high. That mortgage service cost figure of 45 per cent of monthly income figure is deeply misleading.

That's because it is based on median household income. But as the front page splash in yesterday's South China Morning Post made clear, Hong Kong has become a much more unequal place over recent years. As a result, median income is no longer such a great guide to buying power.

Not only have the rich got richer, but thanks to a relative hollowing out among middle-income earners, there are more of them.

And for the property-buying classes - reckoned to be those with a monthly household income of HK$40,000 or above - the cost of servicing a mortgage is considerably less than 45 per cent of their earnings. For many buyers, it's more like 20 per cent - a far more affordable figure.

Of course, they still need to make the down payment; a daunting 30 per cent of the property's value. But given that 60 per cent of Hong Kong's privately owned homes are now mortgage-free, in many cases Mum and Dad, with no payments of their own to make, have little problem stumping up the cash.

And finally there is the government's own role to consider.

By restricting its land supply in recent years (see the second chart), the government has helped push primary market prices sharply higher.

This is not only due to the standard supply/demand dynamic that you would expect. There is also a more subtle force at work.

In the days when land sales were plentiful, developers relied on high volumes of sales to generate their profits. But with the land supply squeezed, they naturally concentrated on making greater margins from lower volumes, which meant building "luxury" flats they could sell at much higher prices.

In recent years the combination of these factors has driven home prices sharply higher, and in the near term it will continue to support them at stratospheric levels.

The strangest and most worrying thing about it is that the government doesn't seem to understand what's going on.